5 franchisor challenges and how to fix them
Business is challenging at the best of times, and we have been through the worst the last few years with the lockdowns, and more and more compliance and regulation for small business.
But challenges are what everyone in business constantly faces; change and adversity can however bring out the best in people and trigger new opportunities and innovation.
Here are the challenges we see facing the franchise sector over the next few years post Covid-19 and post retailing challenges.
5 franchisor challenges
- Ongoing compliance and meeting the new disclosure requirements under the new Franchising Code that kicked in on 1 July 2021.
- Finding the right franchisee – those who fit the culture of the franchisor and have the right basic skill sets and the money to take on the franchise.
- The banks have tightened funding to franchisees, so franchisors are now offering finance and vendor terms to their franchisees and considering other models to partner with their franchisees to deal with the lack of finance – these include share equity models, joint ventures and partnership arrangements.
- Uncertainty in the retail and leasing sector, how to cope with lockdowns and their impact on business and dealing with landlords for rent relief.
- Being brave and reviewing the existing franchise model to bring it up to date so franchises meet franchisees’, the regulators’ and the market’s expectations.
There are a number of changes in the new Code changes that began on the 1 July 2021 that will require franchisors to shift out of their comfort zone of control and be more even handed and transparent with their prospective franchisees.
Some of these include
- Restricting the right of a franchisee not to compete at the end of the term
Franchisees can set up a similar business in competition with the franchisor opposition at the end of the term provided they do not use the franchisor’s confidential information and IP, or engage in misleading or deceptive conduct or conduct that may be considered “passing off” at common law, that is where a party represents or suggests a connection in the course of trade with the franchisor’s business.
- Greater disclosure about supplier rebates
- Extended disclosure obligations regarding lease and contributions received by the franchisor
- Rights for the franchisee to terminate during the term
10 things franchisors can do to meet the new challenges
With profit squeeze, retail struggling through numerous lockdowns and reduced margins, franchisors need to offer prospective franchisees an attractive option- one where the overheads are minimised, and the fees charged by a franchisor still make the model work for a franchisee.
Here are 10 things for franchisors to action now:
- Ensure you have updated your franchise agreement and that you are compliant with the new Franchising Code disclosure regime that was actioned on the 1 July 2021.
- Review your franchise model and objectively look at whether it is still current and viable.
- Review the financial modelling for your franchisees (this may have been done many years earlier when the franchise was set up when things were vastly different to what they are now) and see how you can increase their revenue and their profit.
- Review the current marketing fees charged. Do you still need a marketing fund when traditional channels such as radio, TV and local area marketing may have been superseded by social media, Instagram and other online forums?
- Review your IT and CRM systems – are they out of date? And do they provide the financial reporting and benchmarking that you and your franchisees need and would expect?
- Consider what are the right franchise term for your business. The days of granting 20-year terms are now long gone as things move and change at such pace. The new Code changes giving franchisees early right to terminate should be considered.
- Franchisors can no longer charge or pass on legal fees to franchisees after entering into the franchise (even when they are in breach) under the New Code changes so franchisors may need to review their fees and charges for assignment and renewal.
- Franchisors need to provide greater transparency regarding supplier rebates, rebates, and in relation to leases under the new Code and be mindful of the extended cooling off rights and that these only commence once all of the occupancy details are provided to the franchisee
- Accept that you will no longer be able to stop a franchisee at the end of their term establishing a competing business (so long as they do not use your confidential information and your IP).
- As franchisees can now ask for an early surrender of the franchise during the term this will raise issues of whether franchisors consider giving a contractual right to terminate on notice for no cause – something to consider as there seems little point holding onto a franchisee who may not be performing or has lost the desire to be there
Franchisees no longer want to be the test dummies and pioneers of a new brand only to find the business or system or is not financially viable and franchisors therefore need to ensure that the franchise model is financially viable for franchisees.